You Should Not Be in the Forecasting Business: You are Not That Clever

Brexit and Donald Trump’s Twitter led Presidency exemplify why so few fund managers perform consistently well. How does one guess, and it is a guess, the minds of politicians when they can move markets?

These extraordinary times have laid bare that too often by thinking they are the smartest people in the room, or having some crystal ball or time machine, they can ‘forecast’ the market. Little wonder so many of my colleagues are better at marketing than performing.

After all, by forecasting, they think their analysts can do more than the people with the money who actually move the market, they can step in front of the market, knowing which road it will go down, rather than waiting, and riding the coat-tails of the move instead — which is far less risky.

Whereas, the trend-followers, with their algorithms, have come to the fore. Yes, every trade is not successful, and as Winton recently confessed, of course over time returns erode, and so algos need updating.

But, with the smaller player, without liquidity concerns of deploying millions on each trade, the ability to trade say Citi and it’s trends, as can be seen in the image below is clear enough.

We use three main principles:

Our indicators are an amalgamation of multiple sub-indicators and algorithms which measure trends and price momentum; this allows filtering to ensure the odds of a move are in our favour.

Second, we examine trends over multiple time frames. As the markets are a choatic system, and chaos theory teaches us that there are repeated patterns over different perspectives which are indeed repetitions of each other.

Finally, we have a library for pattern recognition — with more distant patterns having a lower weighted importance. (Bit like exponential moving averages but for price patterns) — this using some simple artificial intelligence thanks to Microsoft’s Azure, allow a small player to do a lot better than forecasting (for which read gambling) the markets.

To teach private investors what hedge funds do we have collated some of the best content from my Financial Times ‘Diary of an Internet Trader’ and books on trading: www.trading-champions.com and our partners are 24option.com